Question

Let's talk about computing ordinary income for a partnership. What are the major components of this calculation? What type of deductions are allowed for the partnership?

Answer 1

Partnership taxableincome is calculated much the same way as the taxable income of individuals with a few differences mandated by the Code. First, taxable income is divided into: separately stated items, and. partnership ordinary income or loss.

The Code specifies a list of deductions that are available to individuals but that cannot be claimed by a partnership. These forbidden deductions include the following:

1. Personal exemptions
2. Additional itemized deductions for individuals
3. Taxes paid to a foreign country or to a U.S. possession
4. Charitable contributions
5. Oil and gas depletion
6. Net operating loss (NOL) carryback or carryover

Each partners distributive share of the partnership's income must be reported.

the following items that must be stated:

1. Net short-term capital gains and losses.
2. Net long-term capital gains and losses.
3. Section 1231 gains and losses,
4. Charitable contributions.
5. Dividends eligible for a dividends-received deduction.
6. Taxes paid to a foreign country or to a U.S. possession.
7. Any other items provided by the Regulations.

A partnership has net income per books of $63,000 computed as follows:

Net sales	$122,000
Sec. 1245 recapture	18,000
Long-term capital gain	15,000
Charitable contributions	10,000
Administrative expenses	82,000
	----------
BOOK INCOME	$ 63,000

The partnership bottom line ordinary income is $58,000 ($122,000 + $18,000 - $82,000). The long-term capital gain and the charitable contributions are separately stated items. Also note that partnership taxable income is $63,000 (the sum of the bottom line income plus separately stated items.)

It should be noted that the bottom line income or loss is sometimes incorrectly referred to as partnership taxable income. Although it is never totaled for reporting purposes, partnership taxable income is the sum of the separately stated items plus the bottom line income. Therefore, partnership taxable income is often substantially greater than partnership ordinary income.